When you work for yourself, tax is not taken from your income before it reaches your bank account.
That means part of the money coming into your business may need to be kept aside for HMRC.
So, how much should you save?
Start with 20% to 30%
As a general starting point, putting aside around 20% to 30% of your profit can help you build a tax pot.
Your profit is what is left after allowable business expenses have been deducted from your income.
For example, if you earn £3,000 in a month and have £1,000 of allowable expenses, your profit is £2,000.
Saving 25% would mean moving £500 into your tax pot.
It is only a guide. The amount you actually owe will depend on your total income and circumstances.
Why save more than the basic tax rate?
Your Self Assessment bill may include more than Income Tax.
Depending on your profits, you may also have National Insurance to pay.
You could also be asked to make payments on account towards your next tax bill.
This can make your first larger Self Assessment payment feel surprisingly expensive if you have not prepared for it.
What are payments on account?
Payments on account are advance payments towards your next Self Assessment bill.
They are normally due in January and July and are based on your previous tax bill.
They do not apply to everyone, but they are worth knowing about when you start putting money aside.
Make saving for tax a habit
You do not need to wait until your tax return is due.
Consider keeping your tax money in a separate savings account and transferring money across regularly.
Doing this throughout the year means the money is already there when HMRC needs paying.
What if I save too much?
That is rarely a bad problem to have.
Once your tax return has been completed and you know what you owe, anything left in your tax pot is still yours.
It is much easier than discovering you have saved too little.
Know where you stand
The percentage you need to save can change as your business grows.
Keeping your bookkeeping up to date gives you a clearer picture of your profit, which makes it easier to estimate what you may owe and plan ahead.
Brease keeps your bookkeeping organised throughout the year, with easy-to-use accounting software and support from real accountants.
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Looking for more simple business advice?
This guide is part of the Brease Guides collection, created to help sole traders understand bookkeeping, tax and Making Tax Digital without the jargon.
